HG 


IC-NRLF 


«/77 


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s 


GIFT   OF 


GIFT 
25' 1913 


T  ETTER  from   Messrs. 
^  J.  P.  Morgan  &  Co., 

in  response  to  the  invita- 
tion of  the  Sub-Committee 
(Hon.  A.  P.  Pujo,  Chair- 
man) of  the  Committee  on 
Banking  and  Currency  of 
the  House  of  Representa- 


tives. 


NEW  YORK  CITY 

February  25,  1913 


Letter  from  Messrs.  J.  P.  Morgan  &  Co.,  in  response  to  the 
invitation  of  the  Sub-Committee  (Hon.  A.  P.  Pujo,  Chairman)  of 
the  Committee  on  Banking  and  Currency  of  the  House  of  Repre- 
sentatives. 


To  Honorable  A.  P.  Pujo,  Chairman, 
Committee  on  Banking  and  Currency, 
House  of  Representatives, 

Washington,  D.  C. 
Dear  Sir: 

You  have  invited  us  to  supplement  the  recent 
inquiry  of  your  Committee  by  presenting  "  such  con- 
siderations as  may  occur  to  you  (us)  bearing  upon  the 
question  of  concentration  and  control  of  money  and 
credit." 

In  presenting  such  considerations  we  find  it  necessary 
to  revert  to  the  original  Preamble  and  House  Resolu- 
tion No.  504,  under  which  your  Committee  acts  and  at 
the  outset  to  suggest  that,  in  the  main,  the  conditions 
described  in  the  Preamble  and  Resolution,  as  possibly 
existing  and  as  calling  for  investigation  and  remedy,  do 
not  and  cannot  exist  in  this  or  in  any  other  country. 
We  would  suggest  further,  with  the  utmost  respect,  that 
a  large  part  of  the  valuable  time  of  your  Committee,  in 
our  belief,  has  been  consumed  in  an  endeavor  to  piece 
out  a  certain  theory'  as  to  money  and  credit,  which 
theory  it  will  be  impossible  ever  to  demonstrate;  for 
its  establishment  is,  and  always  will  be,  prevented  by 
economic  laws  which  have  operated  ever  since  the 
beginning  of  barter  and  trade. 

1 


259529 


We  suggest  to  you  that  such  ills — and  they  are 

neither  few  nor  trifling — as  are  existent  in  this  country's 

financial  affairs  are  the  outcome  of  a 

BANKING  clumsy  and  outworn  banking  system 

SYSTEM  AT 

FAULT  rather  than  of  the  schemes  of  men; 

and  that  to  eradicate  such  ills  at 
their  source,  there  is  needed  not  legislation  upon  some 
one  or  more  isolated  symptoms,  but  rather  a  careful 
diagnosis  of  our  whole  banking  system;  a  study  of  the 
successful  systems  of  other  countries  which  for  decades 
have  been  free  from  the  periodic  panics  which  have  dis- 
tressed this  country;  and  finally  co-operation  among  all 
committees  in  Congress  which  consider  this  subject, 
to  the  one  end  of  wise  and  comprehensive — as  contrasted 
with  piecemeal — legislation. 

In  the  following  considerations,  which  we  offer  with 
respect  and  with  an  earnest  desire  to  co-operate  with 
your  Committee,  we  have  not  hesitated  to  quote  from, 
and  comment  upon  the  Resolution  under  which  your 
Committee  has  acted,  the  language  of  that  Resolution 
in  its  assumptions  being  so  extraordinary,  and  in  its 
intimations  so  unprecedented,  as  to  call  for  especial 
examination.  But  again  we  must  beg  you  to  believe 
that  the  offered  comment  and  suggestion  are  given 
with  due  respect  and  because  of  our  profound  convic- 
tion of  the  importance  of  the  whole  general  subject. 
*Jn  the  statement  submitted  to  you  at  the  close  of  his 
testimony  by  Mr.  H.  P.  Davison  of  our  firm,  we^  ven- 
tured to  point  out  to  you  that  such  "concentration" 

2 


as  has  taken  place  in  New  York  and  other  financial 
centres  has  been  due,  not  to  the  purposes  and  activi- 
ties of  men,  but  primarily  to  the  operation  of  our 
antiquated  banking  system  which  automatically  com- 
pels interior  banks  to  "concentrate"  in  New  York 
City  hundreds  of  millions  of  reserve  funds;  and  next, 
to  economic  laws  which  in  every  country  create  some 
one  city  as  the  great  financial  centre,  and  which  draw 
to  it,  in  enormous  volume,  investment  funds  for  the 
development  of  industrial  enterprises  throughout  the 
country. 

Just  as  grain  and  cotton  and  manufactures  are  com- 
modities subject  to  the  unchanging  laws  of  supply  and 
demand,  so,  in  the  same  way,  money 
and  credits  are  commodities  subject 

DEMAND  THE 

FACTOR  ^°        same  unvarying  laws,  but  far 

more  intensely;  for  while  bulky 
merchandise  is  not  always  immediately  transferable 
upon  demand,  money  and  credits  are  so  liquid  as  to 
be  transferable  by  telegraph  all  over  the  world.  It 
follows  therefore  that  such  "  concentration  "  as  exists 
in  New  York  City  (except  that  caused  by  our  archaic 
banking  system  already  alluded  to)  is  due  simply  to 
the  flow  of  demand  and  supply.  Internationally  like- 
wise, when  the  demand  for  money  and  credit  in  Europe 
exceeds  that  in  America,  gold  is  drawn  by  export  from 
New  York  to  the  other  side. 

We  lay  especial  stress  upon  this  point  of  economic 
rule,  for  the  reason  that  not  only  the  Resolution  (H. 

3 


Res.  504)  under  which  your  Committee  acts,  but  many 
questions  to  witnesses,  indicated  a  belief  that  for  their 
own  selfish  ends  certain  men,  or  a  group  of  them,  have 
succeeded  in  transcending  the  laws  of  supply  and  de- 
mand (which  operate  all  over  the  world)  and  in  estab- 
lishing new  economic  laws.  We  venture  to  point  out 
that,  since  the  beginning  of  organized  industry  and  com- 
merce covering  more  than  two  centuries  in  England, 
France  and  Germany  and  one  hundred  years  in  America, 
men  never  yet  have  succeeded  in  over-riding  economic 
law;  and  further  that  such  an  achievement  is  im- 
possible, even  though  one  were  willing  to  attribute 
sinister  motive  to  the  leading  men  of  business  in  the 
chief  cities  of  this  country. 

Still  dwelling  upon  this  subject,  we  refer  to  the 
language  of  the  Preamble  which  reads:  "  Whereas 
AN  UTTERANCE  ^  nas  been  further  charged  and  is 

ALARMING  generally  believed  (the  italics  are  our 

TO  THE  PUBLIC 


financiers  x  x  x  are  enabled  x  x  to  regulate  the  interest 
rates  for  money;  to  create,  avert  and  compose  panics, 
etc."  Here  is  a  specific  suggestion  of  a  novel  economic 
theory,  the  publication  of  which  cannot  fail  to  create 
prejudice  throughout  the  country  among  many  citizens, 
who  fail  to  reflect  that  the  factors  which  determine  in- 
terest rates  are  not  local  in  their  source,  but  are  world- 
wide, being  determined  and  —  owing  to  the  freedom 
of  international  exchange  —  being  regulated  by  the 
average  demand  for  credit  throughout  the  world's 

4 


money  markets.  If  any  one  man  or  group  of  men 
had  the  ability  and  resources  — which  they  have 
not — to  withhold  credits  in  any  one  market  like 
New  York,  the  situation  would  ordinarily  be  promptly 
relieved  by  the  automatic  inflow  of  credits  from 
some  altogether  foreign  source.  The  factor  which 
intensified  the  distressful  conditions  in  October,  1907, 
was  that  all  the  world's  markets  were,  and — during  a 
year  previous — had  been  suffering  from  an  excessive 
shortage  of  money  which,  as  has  many  times  been 
pointed  out  by  economic  observers  here  and  abroad, 
was  because  of  extraordinary  business  "  booms  "  in 
this  country,  Great  Britain  and  Germany,  as  well  as 
adventitious  and  enormous  wastes  of  capital  such  as 
had  been  caused  by  the  San  Francisco  fire  and  the 
Russo-Japanese  war.  In  countries  other  than  the 
United  States,  the  stress  of  October,  1907,  due  to  high 
money  rates  and  financial  disturbance,  was  relieved  by 
the  operation  of  banking  systems  devised  by  experience 
to  cope  with  precisely  such  conditions;  whereas  in  this 
country,  owing  to  its  weak  banking  system,  acute  dis- 
turbance was  greatly  prolonged  and  caused  infinite 
distress. 

Our  hesitation  to  describe  in  such  detail  these  obvious 

causes  for  the  panic  of  1907  has 
THE  PANIC  V"T  ,  , , 

OF  19Q7  been  overcome  only  by  reason  of  the 

extraordinary  statement  in  the  Con- 
gressional resolution  above  quoted,  and  by  the  report 
to  us  that  an  appreciable  portion  of  the  community 

5 


has  come  to  believe,  from  this  statement,  from  the 
authorized  interview  given  out  by  one  of  your  asso- 
ciate counsel  upon  his  retirement  from  your  service, 
and  from  other  similar  statements  that  in  large  measure 
the  panic  of  1907  was  actually  due  to  the  machinations 
of  certain  powerful  men.  We  regret  that  a  belief  so 
incredible,  so  abhorrent  and  so  harmful  to  the  country 
should  for  a  moment  have  found  lodgment  anywhere. 
And  we  welcome  your  invitation  as  an  opportunity  for  us 
to  state  that,  to  the  extent  of  our  observation  and  exper- 
ience, there  is  not  even  a  vestige  of  truth  in  the  idea  that, 
in  whole  or  in  any  part — the  financial  convulsion  of 
1907  was  brought  on  through  the  design  of  any  man  or 
men. 

No  one  will  deny  that  men  frequently  are  selfish, 
ambitious  and  reckless,  but  in  order  to  sustain  the  theory 
that  the  panic  of  1907  was  "  engineered  ",  one  must 
attribute  to  the  "  engineers  "  not  only  the  power,  but 
some  motive  for  their  assumed  achievements.  And  by 
no  process  of  reasoning  can  such  motive  be  imagined, 
because  of  the  fact  that  the  men  possessing  even  a 
fraction  of  the  influence  and  resources  attributed  to  them 
always  are  the  ones  holding  the  largest  amounts  of  fixed 
investments  which,  by  disturbed  financial  conditions, 
always  suffer  most  severely.  It  is  a  fact  that  those  in- 
dividuals, private  bankers  and  banks  to  whom  alone 
apparently,  by  the  language  of  the  Preamble,  is  attri- 
buted the  power  "  to  create,  avert  and  compose  panics  ", 
were  the  ones  to  suffer  most  by  the  severe  shrinkage  in 

6 


security  values,  such  losses — as  the  public  records  will 
in  many  cases  show — running  into  many  millions  of 
dollars.  It  is  impossible,  therefore,  to  imagine  a  motive 
on  the  part  of  such  persons  as  would  lead  to  a  campaign 
of  self-destruction. 

Furthermore,  our  observation  was  that  such  indi- 
viduals and  corporations  as  were  fortunate  enough,  when 
the  panic  was  raging  and  when  se- 

WHO  THE 

curity  prices  were  at  their  lowest,  to 

LOSERS  WERE  ^°^  anv  considerable  amount  of 
liquid  resources,  invariably  devoted 
such  resources  to  the  aid  of  the  weaker  members  of 
the  community  and  deliberately  refrained  from  put- 
ting their  funds  into  low-priced  securities  for  the 
purposes  of  profit. 

It  has  often  been  observed  that  Mr.  Morgan  aided 
actively  and  effectively  in  the  efforts  to  "  com- 
pose "  the  panic  of  1907.  Such  aid  as  he  was  able 
to  render  to  the  situation  in  New  York  at  that 
time  was  due,  we  believe,  simply  to  his  ability 
in  securing  the  prompt  co-operation  of  many  divergent 
minds  which  represented  strong,  independent  banks. 
The  same  kind  of  service  always  is  to  be  commanded 
in  this  country's  emergencies. 

If  we  have  dwelt  with  more  circumstance  than  per- 
haps your  judgment  approves  upon  these  features  of 
the  Preamble,  it  is  because  we  believe  that  the  whole 
frame-work  and  language  of  the  Congressional  reso- 
lution under  which  you  are  acting  implies  a  con- 

7 


ception    impossible    in    sound    theory,     and   wholly 
impossible  in  practice;  such  theory  being  that  a  com- 
paratively small  group  of  men,  chiefly 

AiN    £.CIJI>HJJViH^ 

IMPOSSIBILITY  centred  in  New  York  City,  can  and 
do  obtain  such  complete  mastery 
over  the  financial  machinery  of  one  hundred  millions 
of  independent  people  that  they  have  power  to  cause 
this  whole  country  incalculable  distress,  or  as  the  Reso- 
lution puts  it:  "  have  wielded  a  power  over  the  business, 
commerce,  credits  and  finances  of  the  country  that  is 
despotic  and  perilous  and  is  daily  becoming  more 
perilous  to  the  public  welfare." 

For  the  maintenance  of  such  an  impossible  economic 
theory  there  have  been  spread  before  your  Committee 
elaborate  tables  of  so-called,  inter- 
locking directorates  from  which  ex- 

STATISTICS  . 

PRESENTED  ceedingly  mistaken  inferences  have 

been  publicly  drawn.  In  these 
tables  it  is  shown  that  180  bankers  and  bank  directors 
serve  upon  the  boards  of  corporations  having  resources 
aggregating  twenty-five  billion  dollars,  and  it  is  implied 
that  this  vast  aggregate  of  the  country's  wealth  is  at 
the  disposal  of  these  180  men.  But  such  an  implication 
rests  solely  upon  the  untenable  theory  that  these  men, 
living  in  different  parts  of  the  country,  in  many  cases 
personally  unacquainted  with  each  other,  and  in  most 
cases  associated  only  in  occasional  transactions,  vote 
always  for  the  same  policies  and  control  with  united 
purpose  the  directorates  of  the  132  corporations  on 

8 


which  they  serve.  The  testimony  failed  to  establish 
any  concerted  policy  or  harmony  of  action  binding 
these  180  men  together,  and  as  a  matter  of  fact  no 
such  policy  exists.  The  absurdity  of  the  assumption 
of  such  control  becomes  more  apparent  when  one 
considers  that  on  the  average  these  directors  represent 
only  one  quarter  of  the  memberships  of  their  boards. 
It  is  preposterous  to  suppose  that  every  "  interlocking  " 
director  has  full  control  in  every  organization  with 
which  he  is  connected,  and  that  the  majority  of  direc- 
tors who  are  not  "  interlocking  "  are  mere  figure-heads, 
subject  to  the  will  of  a  small  minority  of  their  boards. 

Perhaps  the  greatest  harm  in  the  presentation  re- 
ferred to  lay  in  the  further  unwarranted  inference,  to 
which  has  been  given  wide  publicity,  that  the  vast  sum  of 
$25,000,000,000.  was  in  cash  or  liquid  form,  subject  to 
the  selfish  use  or  abuse  of  individuals.  Such  an  idea 
excites  the  public  mind  to  demand  the  correction  of  a 
fancied  situation  which  does  not  and,  in  our  belief, 
never  can  exist. 

In  like  manner  an  endeavor  has  been  made  to  show, 
not  by  means  of  exact  statistics  which  alone  can  tell 
the  story,  but  rather  through  dis- 
DECENTRALIZA-  jointed  testimony  obtained  in  the 
TION  THE  RULE  the  shape  of  replies  to  hypothetical 
questions  that  New  York  is  far  out- 
stripping the  rest  of  the  country  in  comparative  banking 
resources.  Precisely  the  contrary  is  the  case.  The  re- 
ports of  the  Comptroller  of  the  Currency  show  not 

9 


only  that  there  has  been  no  such  tendency  here,  but 
that,  for  some  time,  New  York's  proportion  of  the  coun- 
try's banking  capital  and  resources  has  been  declining. 
The  banking  resources  of  forty-one  (41)  other  States 
have  increased  since  1900  more  rapidly  than  they  have 
in  New  York  State;  and,  whereas  in  1900  New  York 
City  Banks  represented  23.2  per  cent,  of  the  banking 
resources  of  the  United  States,  now,  as  pointed  out  in 
Mr.  Davison's  statement,  they  represent  only  18.9 
per  cent,  of  such  resources. 

This  striking  tendency  toward  a  greater  and  greater 
diffusion  of  American  banking  is  illustrated  further  by 
the  fact  that  between  1900  and  1912  the  number  of 
independent  banks  in  the  country  has,  according  to  the 
best  reports  obtainable,  increased  from  10,378  to  25,160, 
or  by  more  than  140%,  while  the  population  increased 
by  less  than  25%  in  the  same  period.  Here  is  complete 
evidence  of  a  tendency  operating  to-day  toward  the 
decentralization  of  banking  facilities. 

Other  evidence  was  adduced  before  your  Committee 
from  which  the  inference  was  sought  to  be  drawn  that 

during  the  autumn,  when  interest 
INCOMPLETE  (t  „  „  ,  .  XT  Tr  , 

AND  MISLEADING  *****  ™  ^  10aM  m  NeW  ^^ 
FIGURES  are  likely  to  be  high,  interior  banks 

were  in  the  habit  of  withholding 
money  from  their  local  customers,  who  needed  it  for 
agricultural  and  mercantile  operations,  and  of  sending 
it  to  New  York  to  be  loaned  against  Stock  Exchange 
collateral.  The  evidence  on  this  point  was  incomplete 

10 


and  misleading.  No  attempt  whatever  was  made  to 
demonstrate  whether  the  total  amount  of  funds  in  New 
York,  belonging  to  interior  banks,  usually  rises  or  falls 
with  the  rise  and  fall  of  "  call "  interest  rates  in  the 
autumn  in  New  York.  As  a  matter  of  actual  fact  the 
totals  of  such  interior  funds  almost  invariably  fall  as 
the  autumn  rates  rise.  At  every  such  season  New  York 
institutions  lend,  as  they  ought  equitably  to  do,  large 
sums  to  their  interior  correspondents  for  crop-moving 
and  other  purposes.  For  instance  as  to  the  season  just 
past,  the  amount  of  money  being  loaned,  as  of  November 
15,  1912  to  outside  institutions  by  the  eight  largest  New 
York  banks  cultivating  this  business  is  estimated  as 
approximating  upwards  of  $80,000,000. 

Yet,  although  such  adequate  evidence  was  readily 
available,  the  Committee's  experts  who  testified  on 
this  point  gave  to  you  and  to  the  public  figures  which, 
in  their  deductions,  were  absolutely  incomplete  and 
incorrect. 

In  offering  to  you  such  criticisms  as  we  have  upon  the 
incompleteness  of  certain  features  of  the  testimony  laid 
before  you,  we  once  more  beg  that  you  will  not  consider 
us  as  lacking  in  respect  to  your  Committee,  or  as  out 
of  harmony  with  its  desires  to  examine  certain  features 
which,  as  to  the  financial  development  of  this  country, 
have  attracted  widespread  attention.  We  readily 
concur  with  you  that  many  highly  legitimate  subjects 
of  value  to  the  public  interest  have  been  developed. 
One  of  these,  to  which  we  call  particular  attention,  has 

ll 


been  the  steady  growth  in  the  size  of  banks  through 
consolidation  or  increase  of  capital.  Such  growth  in 
the  size  of  banks  in  New  York  and  Chicago  has  fre- 
quently been  erroneously  designated  before  your  Com- 
mittee as  "  concentration/'  whereas  as  we  have  hitherto 
pointed  out  the  growth  of  banking  resources  in  New 
York  City  has  been  less  rapid  than  that  of  the  rest  of 
the  country.  But  increase  of  capital  and  merger  of  two 
or  more  banks  into  one  institution  (with  the  same 
resources  as  the  aggregate  of  the  banks  merging 
into  it)  has  been  frequent,  especially  since  January 
1,  1908. 

These  mergers,  however,  are  a  development  due 
simply  to  the  demand  for  larger  banking  facilities  to  care 

for  the  growth  of  the  country's  busi- 
DEMAND  FOR  ness.  As  our  cities  double  and  treble 
LARGER  BANKS  in  size  and  importance,  as  railroads 

extend  and  industrial  plants  expand, 
not  only  is  it  natural,  but  it  is  necessary  that  our 
banking  institutions  should  grow  in  order  to  care  for  the 
increased  demands  put  upon  them.  Perhaps  it  is  not 
known  as  well  as  it  should  be  that  in  New  York  City 
the  largest  banks  are  far  inferior  in  size  to  banks  in 

the  commercial  capitals  of  other 
FAR  BEHIND  . 

EUROPE  a       much  smaller  countries.      The 

largest  bank  in  New  York  City  to- 
day has  resources  amounting  to  only  three  fifths  01 
the  resources  of  the  largest  bank  in  England,  to  only 
one  fourth  of  the  resources  of  the  largest  bank  in 

12 


France,  and  to  less  than  one  fifth  of  the  resources 
of  the  largest  bank  in  Germany.  As  the  Committee 
is  aware,  in  New  York  City  there  are  only  three 
banks  with  resources  in  excess  of  $200,000,000., 
while  there  are  ten  such  institutions  in  London,  five 
in  Berlin  and  four  in  Paris. 

It  is  also  perhaps  not  sufficiently  recognized  that, 
even  as  it  is,  American  banks  have  not  fully  kept  pace 
with  the  development  of  American 
T  business-  Hundreds  of  the  financial 
NEEDS  transactions  of  to-day  are  so  large 

that  no  single  bank  commands  suffi- 
cient resources  to  handle  them.  This  is  especially  true 
with  respect  to  the  great  public  utilities  which  are 
essential  for  the  development  and  welfare  of  the  com- 
munity. Even  our  largest  banks  are  seldom  able  separ- 
ately to  extend  the  credit  which  such  undertakings  re- 
quire, no  one  national  bank  being  permitted  by  law 
to  loan  in  excess  of  10%  of  its  capital  and  surplus  to 
any  one  individual  or  concern.  When  it  is  remembered 
that  literally  hundreds  of  corporations  in  this  country 
are  now  obliged  to  borrow  annually  sums  of  a  million 
dollars  and  upwards  apiece,  it  is  obvious  that  the  size 
of  our  banks  must  grow  to  keep  pace  with  this 
demand. 

Yet  as  to  this  natural  development,  the  causes  for 
which  it  is  of  vital  interest  to  the  whole  country  to 
realize  clearly,  many  of  the  inquiries  directed  to  your 
witnesses  were  of  such  a  nature  as  to  raise  in  the  minds 

13 


of  an  interested  public  a  doubt  as  to  whether,  after  all, 
this  effort  by  banks  to  keep  pace  with  growing  business 
were  not  a  scheme  of  a  designing  group  of  men,  building 
up  enormous  institutions  in  order  (we  quote  here  again 
from  House  Resolution  No.  504)  "  to  augment  their  " 
("  these  groups  of  individuals  ")  power  over  the  finan- 
ces of  the  country  and  to  control,  etc.  etc."  We 
submit  for  your  consideration  the  opinion  that,  if  time 
had  served  you,  far  more  adequate  information,  in- 
cluding instructive  statistics,  might  have  been  pro- 
vided on  this  question  for  your  Committee. 

Likewise,  with  respect  to  the  tendency  to  co-opera- 
tion among  banks,  noted  especially  since  the  panic  of 

1907,  we  believe  that  further  statis- 
GREAT  ISSUES  tics  of  interest  on  this  point  can  be 
TO  BE  FINANCED  made  available,  such  facts  going  to 

show  first,  that  since  1907  co- 
operation has  been  more  active  by  reason  of  the  lesson 
which  banks  in  all  large  cities  then  learned  that,  for 
self-preservation,  they  could  not — as  is  possible  in 
other  countries — rely  upon  a  strong  and  elastic  banking 
system,  but  must  gain  such  protection  by  concurrent 
action;  and  second,  that  such  co-operation  is  simply  a 
further  result  of  the  necessity  for  handling  great 
transactions.  There  are  not  a  few  railroad  bond 
issues  each  exceeding  $100,000,000;  the  American 
Telephone  and  Telegraph  Co.  recently  has  announced 
one  of  $70,000,000.  The  two  traction  com- 
panies operating  the  subways  in  Greater  New  York 

14 


are  planning  to  bring  out  aggregate  issues  of  $220, 
000,000.  The  Attorney  General's  recent  approval 
of  the  Union  Pacific  settlement,  calls  for  a  single  com- 
mitment on  the  part  of  bankers  of  $126,000,000. 
So  that,  if  transactions  of  such  magnitude  are  to  be 
carried  on,  the  country  obviously  requires  not  only  the 
larger  individual  banks,  but  demands  also  that  those 
banks  shall  co-operate  to  perform  efficiently  the  coun- 
try's business.  A  step  backward  along  this  line 
would  mean  a  halt  in  industrial  progress  that  would 
affect  every  wage-earner  from  the  Atlantic  to  the 
Pacific. 

We  lay  perhaps  especial  stress  upon  this  point,  be- 
cause of  what  seemed  to  us  a  readiness  upon  the  part  of 

Committee  to  ad°Pt  the  idea 


COOPERATION 

NECESSARY  FOR    ^na^  m  sucn  co-operation  by  bankers 

COUNTRY'S  there  lies  the  germ  of  something 

GROWTH 

sinister  and  dangerous,  and  that, 
to  quote  once  more  from  House  Resolution  No.  504, 
such  co-operation  has  been  developed  to  the  extent 
that,  "  these  groups  of  individuals  "  can  "  prevent 
competition  with  the  enterprises  in  which  they  are 
Interested,  to  the  detriment  of  interstate  commerce 
and  of  the  general  public." 

Nothing  else  certainly  could  be  more  germane  to  an 
investigation  like  that  of  your  Committee  than  an 
inquiry  as  to  whether,  through  any  means  exerted  by 
banks  or  bankers,  interstate  commerce  is  being  re- 
strained. But  as  establishing  or  even  suggesting  such  a 

15 


contention,  we  have  been  able  to  find  no  testimony 
whatever  upon  the  records  of  your  Committee.  If 
any  such  evidence  is  available,  we  believe  it  impor- 
tant that  it  should  be  produced.  So  far  as  our  obser- 
vation and  experience  go,  we  can  make  the  positive 
statement  that,  except  under  unfavorable  money 
market  conditions,  we  have  never  heard  of  any  re- 
sponsible and  deserving  individual,  firm  or  corporation 
being  unable  to  secure  ample  credit.  The  House  Resolu- 
tion No.  504,  including  its  Preamble, 
FREE-COMPETl-  contains  no  less  than  five  separate 
TION  THE  RULE  references  to  the  possible  "  preven- 
tion, "  "  suppression, "  elimination 
or  absorption  of  "competition,"  through  the  activities 
of  certain  individuals.  Wide  publicity  has  been 
given  to  this  Resolution  under  whose  authority 
your  Committee  has  acted  and,  in  the  absence  of  any 
proof  whatsoever  to  support  the  belief  that  there  has 
been  a  supression  of  corporate  competition,  we  venture 
to  hope  that  this  idea,  most  insidious  and  harmful  in 
its  effect  upon  the  mind  of  the  country  at  large,  will 
in  your  report  be  definitely  dispelled.  In  a  matter  of 
such  great  moment  to  the  prejudices  of  our  citizens, 
we  suggest,  with  great  respect,  that  a  positive  statement 
from  your  Committee  that  no  evidence  has  been 
adduced  on  this  vital  question  should  be  given  pub- 
licity as  wide  as  that  received  by  the  Resolution. 

Testimony,  on  the  other  hand,  going  to  show  not  a 
suppression,  but  a  development  of  trade  throughout 

16 


the  country  might  have  been  of  value,  as  exhibiting 
a  natural  explanation  of  many  of  the  financial  practices 
which  your  Committee  has  questioned.  Many  ques- 
tions were  asked  as  to  the  wisdom  in  having  rep- 
resentatives of  private  banking  houses  sit  upon  the 
boards  of  corporations,  whose  securities  the  same 
bankers  frequently  offer  for  sale.  This  practice  which 
has  been  in  vogue  abroad,  ever  since  the  creation  of 
limited  companies,  has  arisen  not  from  a  desire  on  the 
part  of  the  banker  to  manage  the  daily  affairs  of  the 
corporation  or  to  purchase  its  securities  more  cheaply 

than  he  otherwise  could ;  but  rather 
RESPONSIBILITY 
OF  BANKERS          because  of  his  moral  responsibility  as 

sponsor  for  the  corporation's  securi- 
ties, to  keep  an  eye  upon  its  policies  and  to  protect 
the  interests  of  investors  in  the  securities  of  that  cor- 
poration. For  a  private  banker  to  sit  upon  such  a 
directorate  is  in  most  instances  a  duty,  not  a  privilege. 
Inquiry  will  readily  develop  the  fact  that  the  members 
of  the  leading  banking  houses  in  this  country — and 
it  was  the  leading  houses  only  against  which  animad- 
versions were  directed — are  besought  continually  to 
act  as  directors  in  various  corporations,  whose  securi- 
ties they  may  handle,  and  that  in  general  they  enter 
only  those  boards  which  the  opinion  of  the  investing 
public  requires  them  to  enter,  as  an  evidence  of  good 
faith  that  they  are  willing  to  have  their  names  publicly 
associated  with  the  management. 

Yet,  before  your  Committe,  this  natural  and  eminent- 

17 


ly  desirable  relationship  was  made  to  appear  almost 

sinister,  and  no  testimony  whatever  was  adduced  to 

show  the  actual   working  of  such 

relationships.    It  is  easy  to  overlook 

OH  A 

BANKING  HOUSE  the  fact  that  Poetically  all  the 
railroad  and  industrial  develop- 
ment of  this  country  has  taken  place,  initially 
through  the  medium  of  the  great  banking  houses. 
Were  it  not  for  the  opportunities  provided  by  these 
houses,  it  is  difficult  to  imagine  how  the  great  trans- 
portation systems  and  industrial  plants  of  the  country 
could  have  been  created.  Many  persons  fail  to  realize 
the  variety  of  the  functions  performed  by  these  banking 
houses.  If  a  transcontinental  railway  system,  building  up 
the  wheat  farms  of  the  west  and  affording  employment 
to  thousands  of  workmen,  desires  to  obtain  $100,000,000. 
for  purposes  of  still  further  development,  it  goes 
to  some  great  banking  house  or  institution  for  a 
market  for  its  securities.  The  bankers  make  expert 
investigation  of  the  property,  agree  to  buy  the 
bonds  and  thus  to  make  possible  a  great  and  important 
development  two  or  three  thousand  miles  away.  Next 
the  banking  house  serves  the  investing  community. 
Thousands  of  investors  are  seeking  sound  securities 
for  their  savings.  They  have  neither  the  knowledge 
nor  the  opportunity  for  investigating  a  great  rail- 
road enterprise.  They  look  to  a  banking  house  to 
perform  those  functions  and  to  give  its  stamp  of 
approval  to  that  railroad's  securities.  In  this  manner 

18 


the  banking  house  fulfills  a  double  duty  to  the  com- 
munity. 

Another  line  of  your  inquiry,  certainly  pertinent  to 
to  the  general  subject,  was  as  to  whether  "  the  market- 
ing of  the  securities  that  from  time  to 

ow  time   have    been   issued   by   inter- 

SECURITIES  /. 

ARE  HANDLED  state  railroads  and  industrial  cor- 
porations has  been  by  competitive 
bidding  or  otherwise."  This  question  is  of  such  im- 
portance that  there  must  be  general  regret  that  the 
time  of  your  Committee  did  not  serve  for  the  exhaustive 
study  of  the  subject,  which  you  undoubtedly  desired, 
including  testimony  from  enough  diverse  sources  to 
show  you  the  exact  situation.  On  this  matter  we  are 
pleased  to  submit  certain  «.  onsiderations  which,  we  are 
confident,  are  borne  out  by  the  facts:  First,  in  general 
and  over  a  period  of  time,  the  sale  of  such  securities 
is  invariably  subject  to  the  competition  of  market  con- 
ditions. We  have  not  heard  of  an  instance  where  any 
corporation  failed  to  secure  the  benefit  of  a  price  for 
its  issues  as  excellent  as  conditions  at  the  time 
warranted.  Second,  in  most  of  the  leading  commercial 
States  Public  Service  Commissions  pass  with  great  care 
upon  the  prices  at  which  the  securities  of  all  transporta- 
tion and  public  utility  corporations  are  sold.  Third, 
competitive  bidding,  in  the  sense  of  having  railroad  and 
industrial  securities  offered  practically  at  public  auction 
as  in  the  case  of  municipal  securities,  is  seldom  or  never 
practised. 

19 


The  reasons  against  such  practise  are  plain.  Such 
corporate  issues  have  neither  the  security,  the  steadi- 
ness nor  the  general  confidence  possessed  by  municipal 
bonds,  and  while  in  good  times  it  is  possible  that  they 
might  be  subscribed  for  at  public  auction,  in  bad  times 
there  would  be  no  one  to  bid  for  them.  It  is  practi- 
cally inconceivable  that  a  municipality  should  go 
bankrupt  and  make  permanent  default  of  its  obliga- 
tions. Quite  otherwise  is  the  case  with  railroad  or 
industrial  corporations.  Should  these  latter  appeal 
directly  to  the  proverbially  timid  investor  there  can  be 
little  question  that,  in  times  of  stress,  support  would  be 
totally  lacking.  We  should  have  the  spectacle  of 
numberless  corporations  failing  for  lack  of  strong 
financial  or  banking  support. 

The  enlisting  of  such  support,  in  the  shape  of  fiscal 
agencies  or  of  other  close  relations  with  bankers, 

appears  sound  both  in  principle  and 
SECURITIES  BY  practise.  For  their  ultimate  suc- 
AUCTION  cess,  great  enterprises  depend  almost 

as  much  upon  wise  financial  counsel 
as  upon  technical  management.  A  great  business, 
well  conceived  as  to  interior  organization,  frequently 
goes  on  the  rocks  for  failure  to  obtain  broad  and  strong 
financial  guidance.  Any  man  undertaking  to  build  a 
cotton  mill,  perfectly  appointed  with  modern  machin- 
ery and  technical  skill,  who  should  rely  upon  obtaining 
the  necessary  funds  by  a  public  appeal  to  investors 
would  be  deemed  reckless.  Yet  such  a  principle 

20 


is  precisely  that  involved  in  the  suggestion  that  corpor- 
ations should  refrain  from  making  financial  arrange- 
ments and  should  rely  upon  securing  their  money  from 
the  offer  of  their  securities  at  public  auction.  Further- 
more, as  has  been  hitherto  pointed  out  in  this  memor- 
andum, a  large  factor  which  inspires  confidence  in  the 
investor  and  leads  him  to  purchase  some  specific  secur- 
ity is  the  knowledge  that  banking  houses  of  good  stand- 
ing have  investigated  that  particular  security  and 
themselves  have  underwritten  or  have  invested  in  it. 

Still  another  consideration  inducing  large  corpora- 
tions to  appoint  fiscal  agents  is  that  frequently  such 
corporations  are  obliged  to  undertake  operations  of 
such  magnitude  and  complexity  over  a  series  of  years, 
that  they  must  invoke  uninterruptedly  the  best  finan- 
cial advice  obtainable.  An  operation  like  that  of  the 
Pennsylvania  and  the  Long  Island  Railroads  in  tunnell- 
ing respectively  the  Hudson  and  the  East  Rivers,  and 
building  an  enormous  terminal  in  the  heart  of  New 
York,  involved  the  expenditure  of  say  $200,000,000.  and, 
from  inception  to  completion,  occupied  the  best  part  of 

a  decade.     The  unwisdom  of  em- 

FINANCIAL  t  •    i  •  j        i 

barking  upon  such  a  development 

ADVISERS  A 

REQUISITE  an          relying  through  good  times 

and  bad,  panic  periods  and  other- 
wise, upon  the  sale  of  $200,000,000.  bonds,  by  auction 
to  the  public,  could  hardly  be  characterized,  even  if  it 
were  conceivable.  Another  example  might  be  men- 
tioned in  the  irrigation  enterprises  of  the  West.  It  is 

21 


estimated  that  there  has  been  expended  in  such  devel- 
opment not  less  than  $200,000,000.  How  far  would 
such  development  have  gone,  how  far  would  those 
regions  have  been  opened  to  agriculture  had  dependence 
for  obtaining  that  great  sum  been  placed  upon  the 
nearby  communities,  or  even  (by  means  of  public 
auction)  upon  investors  in  New  York  or  Chicago  who 
know  little  of  the  safety  of  such  investments .  Persons 
who  decry  the  close  relations  existing  between  the 
bankers  and  the  great  transportation  and  industrial 
businesses  fail  to  perceive  that,  as  individuals  require 
the  advice  of  lawyers  and  physicians,  so  great  enter- 
prises require  financial  diagnosticians  who  can  give 
counsel  as  to  the  world's  investment  markets,  as  to 
what  form  of  securities  is  best  adaptable  for  any  given 
time,  as  to  what  financial  policy  for  the  corporation  is 
best  calculated  to  command  the  confidence  and  the 
steady  support  of  the  investor. 

One  phase  of  a  far  different  feeling  at  present  to  be 
noted  in  America,  finds  repeated  expression  in  the 

Preamble  and  Resolution  to  the 
OFFICERS  ARE  . 

INDEPENDENT        effect    that    financial    groups    have 

"  control  over  the  aforesaid  railroads, 
industrial  corporations,  and  moneyed  institutions, 
etc.;"  that  such  an  influence  is  exerted  powerfully 
over  the  officers  and  management  of  such  institu- 
tions, and  that  such  influence  is  exerted  primarily 
for  the  benefit  of  the  individuals.  Persons  that  accept 
such  a  belief  must  fail  to  realize  that  no  corporation 

22 


could  long  survive  if  the  operations  of  the  corpora- 
tion and  the  freedom  of  its  officers  were  interfered  with 
by  directors  desiring  to  serve  selfish  interests.  The 
success  of  an  enterprise  depends  largely  upon  the 
ability  and  zeal  of  its  officers  exerted  independently 
of  any  interest  except  that  of  the  enterprise  itself.  Any 
attempt  by  directors  working  to  their  own  ends  would 
result  either  in  the  ruining  of  the  business,  were  the 
officers  to  yield  up  their  independence;  or  in  the  prompt 
resignation  of  such  officers  if  they  were  men  of  character. 
And  since  when,  it  may  be  asked,  has  the  ownership 
of  stock  meant  the  ownership  of  men? 

A  distinction  which  one  line  of  your  inquiry  sought 
to  establish  was  that  as  to  the  relative  safety  of  banks 

and  banking  houses  as  depositaries. 

Your   inquiries   on   this   point,   al- 

BANKERS  AS 

DEPOSITARIES  though  purely  tentative  and  with- 
out attempt  to  cite  any  records  which 
might  bear  upon  the  subject,  left  the  impression  that 
you  doubted  the  wisdom  of  permitting  corporations  to 
select,  as  depositaries  for  their  funds,  private  bank- 
ers as  well  as  banks.  This  is  a  matter  of  less  grave 
concern  to  the  public  than  many  points  having  to  do 
with  the  fundamental  character  of  our  banking  laws, 
and  our  opinions  on  this  particular  topic  are  likely 
to  be  accepted  with  considerable  reserve.  Yet  it  may 
be  of  value  to  inquire  whether  experience  offers  any 
data  going  to  show  that  incorporated  banks  have  proved 
themselves  in  structure  or  in  practise,  more  impregnable 

23 


from  failure  than  private  banks.  Incorporated  banks 
possess,  from  the  depositor's  point  of  view,  such  safe- 
guards as  are  extended  by  existing  methods  of  state 
supervision.  And  the  National  Bank  Act  wisely  pro- 
vides that,  in  the  event  of  a  bank's  failure,  the  share- 
holders shall  be  liable  to  the  extent  of  twice  the  amount 
of  the  capital  stock.  With  private  banks,  however, 
the  liablity  for  the  funds  of  depositors  is  unlimited,  and 
the  total  private  means  of  each  partner  are  subject  to 
the  firm's  obligations.  From  the  early  days  of  banking 
all  over  the  world  until  about  seventy-five  years  ago, 
the  rule  was  that  the  community  used  private  bankers 
as  their  chief  depositaries.  Then  came  in,  though 
not  without  great  public  opposition,  the  plan  of  creating 
banks  as  stock  corporations  with  the  very  purpose  of 
limiting  the  risks  of  the  owners  of  these  banking  cor- 
porations. Strong  as  such  institutions  have  proved  to 
be,  it  may  be  said  with  some  reason 

UNLIMITED  that  the  common  law  which  requires 

LIABILITY  A 

SAFEGUARD  t      '       any  Pnvate   banking  house 

is  forced  to  suspend,  the  private 
fortune  of  every  member  of  that  firm  shall  be  utterly 
swept  away  before  a  depositor  suffers  the  loss  of  a 
penny,  is  unquestionably  a  factor  tending  towards 
prudent  and  conservative  management.  In  face  of  the 
available  records,  showing  a  considerable  number  of 
suspensions  among  incorporated  institutions  in  New 
York  City,  as  the  result  of  the  1907  panic,  we 
can  recall  no  instance  whatever  of  the  similar  sus- 

24 


pension  of  any  private  banking  house  handling  corpo- 
rate deposits. 

In  view  of  these  facts,  we  submit  that  in  this  matter 
it  would  be  wise  to  secure  evidence  from  all  large 
cities,  bearing  upon  the  benefits  or  the  actual  dangers 
shown  by  experience,  before  proposing  any  law,  the 
effect  of  which  automatically  might  be  to  deprive  inter- 
state corporations  from  exercising  their  best  judgment 
as  to  where  they  may  prudently  extend  credit.  In  es- 
sence, if  a  corporation  is  to  be  prohibited  from  extending 
a  credit  of  $100,000  to  a  banking  house  which,  it  has 
reason  to  believe,  can  return  that  credit  upon  demand, 
why  should  the  law  not  be  invoked  to  prevent  it  extend- 
ing merchandise  credit  of  similar  amount  to  some  sol- 
vent customer? 

As  the  final  point  of  this  memorandum,  we  venture 
to  submit  the  consideration  that  in  a  strong  public 
opinion,  such  as  exists  in  this  country,  there  lies 
the  greatest  safeguard  of  the  community — always 
assuming  that  Congress  will  evolve  a  basic  system 
of  banking  which  is  scientific  and  sound — as  at 
the  present  time,  ours  admittedly  is  not.  The  public, 
that  is  the  depositors,  are  the  ones 

PUBLIC  OPINION  w^°  en^rus^  bankers  with  such  influ- 
ence and  power  as  they  today  have  in 
every  civilized  land,  and  the  public  is  unlikely  to  entrust 
that  power  to  weak  or  evil  hands.  Your  counsel  asked 
more  than  one  witness  whether  the  present  power  held 
by  bankers  in  this  country  would  not  be  a  menace  if  it  lay 

25 


in  evil  hands.  Such  an  inquiry  answers  itself.  All 
power,  physical,  intellectual,  financial  or  political,  is 
dangerous  in  evil  hands.  If  Congress  were  to  fall  into 
evil  hands  the  results  might  be  deplorable.  But  to  us 
it  seems  as  little  likely  that  the  citizens  of  this  country 
will  fill  Congress  with  rascals  as  it  is  that  they  will 
entrust  the  leadership  of  their  business  and  financial 
affairs  to  a  set  of  clever  rogues.  The  only  genuine 
power  which  an  individual,  or  a  group  of  individuals, 
can  gain  is  that  arising  from  the  confidence  reposed  in 
him  or  them  by  the  community.  Every  town,  large  or 
small,  seems  to  choose  a  limited  number  of  men  (mer- 
chants, manufacturers,  lawyers  and  bankers)  to  repre- 
sent it  in  the  management  of  its  chief,  local  industries. 
Those  men  are  entrusted  with  such  heavy  responsibil- 
ities because  of  the  confidence  which  their  records  have 
established,  and  only  so  long  as  their  records  are 
unblemished  do  they  retain  such  trusts. 

These  are  axioms  which  it  seems  almost  idle  to 
repeat.     They  apply  to  all  business,  but  more  emphat- 
ically, we  believe,  to  banking  than  to  any  other  form 
of  commerce.    To  banking  the  confidence  of  the  com- 
munity is  the  breath  from  which  it 

draws  its  life.  The  past  is  full  of 
THE  LIFE  OF 

BANKING  examples  where  the  slightest  sus- 

picion as  to  the  conservatism,  or  the 
methods  of  a  bank's  management,  has  destroyed  con- 
fidence and  drawn  away  its  deposits  over  night.  Much, 
therefore,  may  be  left  to  the  instinct  and  the  force  of 

26 


public  opinion;  and  finally,  in  urging  upon  you  once 
more  the  establishment  of  a  sound  banking  system,  we 
venture  to  question  the  wisdom  of  engrafting  upon  such 
new  system  many  special  provisions,  designed  to  guard 
against  particular  evils  but  which,  being  restrictive  in 
their  nature,  are  likely  so  to  hedge 

°f  bankin      ^  to 


SPECIALEGIS 

LATION  NEEDED  curtail  severely  the  country's  devel- 
opment. We  believe  that,  with  a 
scientific  banking  system  firmly  established,  many 
features  in  our  present  situation,  perhaps  deemed  ob- 
jectionable by  you,  will  of  themselves  disappear;  and 
that  this  country  will  enjoy  the  experience  of  other  coun- 
tries which,  with  nothing  like  the  same  amount  of  bank- 
ing statutes  in  force  as  we  have,  are  yet  immeasurably 
freer  than  America  from  banking  failures,  and  from 
those  periodic  financial  disturbances  which  bring 
misfortune  to  rich  and  poor  alike  and,  except  for  which, 
these  United  States  today  undoubtedly  would  be  in 
enjoyment  of  a  political  and  national  prosperity  far 
surpassing  any  that  has  been  known  in  the  world's 

history. 

Respectfully  submitted, 

(Signed)  J.  P.  MORGAN  &  Co. 


New  York  City, 
February  25, 1913. 

27 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
BERKELEY 

Return  to  desk  from  which  borrowed. 
This  book  is  DUE  on  the  last  date  stamped  below. 


>tt  15 


S    1953 


? 


LD  21-100m-9,'47(A5702sl6)476 


259529 

//a 


